The Coronavirus Large Business Interruption Loan Scheme

Before the introduction of the CLBILS, the UK government had announced two finance facilities:

• The Coronavirus Business Interruption Loan Scheme (CBILS) which is available to firms with a turnover of less than £45 million, and which meet certain criteria, to apply for funding of up to £5 million under CBILS in tenors up to six years.
• The COVID-19 Corporate Financing Facility (CCFF) which is available to larger firms with an investment grade rating as at 1 March 2020 to issue commercial paper to secure funding of up to £1 billion (depending on the firm's credit rating).

These programmes left businesses with a turnover of more than £45 million but which did not have an investment grade rating without access to government-backed funding.

The CLBILS effectively fills the gap between the CBILS and the CCFF, although businesses with a turnover of more than £45 million that are also rated as investment grade will have the choice of using either the CLBILS or the CCFF. However, firms with no previous experience of the commercial paper market will likely welcome the more familiar and straightforward nature of the CLBILS.

Although badged a 'loan scheme', financing can be made available in a variety of forms, including term loans, revolving credit facilities, overdrafts, invoice financing or asset-backed financing. As with the CBILS, lending under the scheme is by accredited lenders (although not all accredited lenders are able to offer the full range of financing formats). The full list of accredited lenders is available through the British Business Bank website. As with the CBILS, the number of accredited lenders is gradually increasing, and each lender will differ in the speed and manner in which they are able to execute CBILS transactions.

The CLBILS is subject to the following lending limits:

• A business with a turnover of £45 million or more but less than £250 million can apply for up to £25 million in financing.
• A business with a turnover of £250 million or more can seek funding of up to £50 million.

Any financing which qualifies for the scheme is supported by a government guarantee of up to 80 per cent of the outstanding amount of each facility, subject to an overall portfolio cap. The lender will pay a fee to the government for issuance of the guarantee. In line with the Chancellor’s policy of ‘doing whatever it takes’, there is no limit on the size of the scheme and its capacity will be dependent on demand, which is expected to be high at its launch.

The scheme shares many features with the CBILS and in fact uses the same delivery mechanisms of the British Business Bank (which were adapted from its Enterprise Finance Guarantee (EFG) scheme) to ensure its rapid deployment. In addition to corporates, the CLBILS is open to sole traders, partnerships, limited and limited liability partnerships and freelancers, provided that they operate through a business bank account and 50 per cent of their turnover is generated from trading activity (and not, for example, from investment income). The CLBILS is not limited to firms operating in specific sectors, although credit institutions, building societies, insurers and reinsurers are ineligible, as are public sector entities, state funded schools, grant funded universities and further education establishments.

The objective eligibility criteria for CLBILS require the firm to be UK–based in its business activity and to confirm by self-certification that its business has been adversely impacted by COVID-19. In addition, the CLBILS imposes a viability test which is subjective. An applicant must submit a borrowing proposal that the lender would consider viable, absent the economic disruption caused by the current pandemic. The lender must be of the view that the borrower would not go out of business in the short to medium term, and the lender must also reasonably believe that the funding will allow the firm to trade out of any short to medium term cashflow difficulties.

Like the CBILS, the CLBILS does not allow personal guarantees to be required by lenders for loans under £250,000. Claims on personal guarantees cannot cover more than 20 per cent of all the losses on a facility after application of other recoveries, and a lender cannot require security over the guarantor's principal private residence as credit support for the facility.

Although the CLBILS has much in common with the CBILS, there are some differences, including the following:

• Under the CBILS, the £45 million turnover limit applies to the consolidated turnover of the firm’s group undertaking, measured over the preceding 12 months. Presumably, groups that would be ineligible for the CBILS because their turnover is above the £45 million threshold can now apply under the CLBILS, even though it would appear that there is no group turnover test under the CLBILS.
• The CBILS is a temporary replacement for the EFG, whereas the CLBILS is a new scheme.
• CLBILS facilities are only available for a maximum tenor of three years, whereas the CBILS has a three-year limit on overdrafts and invoice financing but allows term loans and asset financing to repaid over six years.

• Unlike CBILS loans, CLBILS facilities are not eligible for business interruption payments, although the government guarantee covers fees and interest as well as principal.

Support for Start-ups

Separately, late on Sunday, 19 April 2020, the UK government announced a £1.25 billion support package for venture capital-backed businesses affected by COVID-19, which were not eligible for existing business support schemes. Part of the package is a £500 million ‘Future Fund’ scheme which will be available in May 2020.The UK Government will use the Future Fund to co-invest in high-growth companies hit by the coronavirus, with state-backed loans from £125,000 to £5 million that can convert into equity stakes when borrowers undertake their next funding round. To be eligible, the start-up must

• Be based in the UK.
• Attract matching funding from third party private investors and institutions.
• Have previously raised at least £250,000 in equity investments from third party investors in the last five years.

The Future Fund will initially provide £250 million in financing, but the scheme could be increased to £500 million, depending on demand and further government approvals. In addition, smaller businesses focused on research and development can apply for up to £750 million in grants and loans which will be made available under an existing scheme administered by Innovate UK, the national innovation agency. The majority of the funding will be available to Innovate UK's 2,500 existing customers, and the first payments are scheduled to be made by mid-May.

Summary

The launch of the CLBILS and the support package for venture capital-backed businesses are the latest building blocks in the UK government’s defences for UK businesses and employees against the adverse impact of COVID-19 on the UK economy and it increases the extent of state support for British business. Like the CBILS and the CCFF, the CLBILS scheme is a temporary measure. Whether their availability will be extended or whether the UK government will respond to calls to increase the state guarantees to 100 per cent of the facility to speed up the delivery of emergency funding to businesses remains to be seen. Meanwhile, start-ups and venture capital firms will watch closely as the UK government adds more detail to the announcement of its plan to support start-ups.

Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.

For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVID-19@reedsmith.com

Client Alert 2020-252